**EXHIBIT 10.23**

 

**ELECTROSCIENTIFIC INDUSTRIES, INC.2004 STOCK INCENTIVE PLAN**

**(As amendedJanuary 25, 2005 and April 20, 2005)**

 

1.     **Purpose.**  Thepurpose of this 2004 Stock Incentive Plan (the “Plan”) is to enable ElectroScientific Industries, Inc. (the “Company”) to attract and retain theservices of selected employees, officers and directors of the Company or anyparent or subsidiary of the Company. For purposes of this Plan, a person isconsidered to be employed by or in the service of the Company if the person isemployed by or in the service of any entity (the “Employer”) that is either theCompany or a parent or subsidiary of the Company.

 

2.     **Shares Subject to the Plan.** Subject to adjustment as provided below and in Section 12, theshares to be offered under the Plan shall consist of Common Stock of theCompany (“Common Stock”), and the total number of shares of Common Stock thatmay be issued under the Plan shall be 3,000,000 shares plus any shares that atthe time the Plan is approved by shareholders are available for grant under theCompany’s 1989 Stock Option Plan, 1996 Stock Incentive Plan and 2000 StockOption Incentive Plan, which plans were previously approved by shareholders ofthe Company, and the Company’s 2000 Stock Option Plan, which plan was notpreviously approved by the Company’s shareholders (collectively, the “PriorPlans”), or that may subsequently become available for grant under any of thePrior Plans through the expiration, termination, forfeiture or cancellation ofgrants.  If an option, stock appreciationright or Performance-Based Award granted under the Plan expires, terminates oris canceled, the unissued shares subject to that option, stock appreciationright or Performance-Based Award shall again be available under the Plan.  If shares awarded as a bonus pursuant to Section 9or sold pursuant to Section 10 under the Plan are forfeited to orrepurchased by the Company, the number of shares forfeited or repurchased shallagain be available under the Plan.

 

3.     **Effective Date and Duration of Plan.**

 

3.1           ***EffectiveDate*****.**  ThePlan shall become effective as of July 15, 2004.  No awards shall be made under the Plan untilthe Plan is approved by shareholders of the Company in accordance with rules ofThe Nasdaq Stock Market.

 

3.2           ***Duration*****.**  ThePlan shall continue in effect until all shares available for issuance under thePlan have been issued and all restrictions on the shares have lapsed.  The Board of Directors may suspend orterminate the Plan at any time except with respect to options,Performance-Based Awards, stock appreciation rights, and shares subject torestrictions then outstanding under the Plan. Termination shall not affect any outstanding options, Performance-BasedAwards, stock appreciation rights or any right of the Company to repurchaseshares or the forfeitability of shares issued under the Plan.

 

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4.     **Administration.**

 

4.1           ***Board ofDirectors*****.**  The Plan shall be administered by the Boardof Directors of the Company, which shall determine and designate theindividuals to whom awards shall be made, the amount of the awards and theother terms and conditions of the awards. Subject to the provisions of thePlan, the Board of Directors may adopt and amend rules and regulationsrelating to administration of the Plan, advance the lapse of any waitingperiod, accelerate any exercise date, waive or modify any restrictionapplicable to shares (except those restrictions imposed by law) and make allother determinations in the judgment of the Board of Directors necessary ordesirable for the administration of the Plan. The interpretation and construction of the provisions of the Plan andrelated agreements by the Board of Directors shall be final andconclusive.  The Board of Directors maycorrect any defect or supply any omission or reconcile any inconsistency in thePlan or in any related agreement in the manner and to the extent it deemsexpedient to carry the Plan into effect, and the Board of Directors shall bethe sole and final judge of such expediency.

 

4.2           ***Committee*****.** TheBoard of Directors may delegate to any committee of the Board of Directors (the“Committee”) any or all authority for administration of the Plan.  If authority is delegated to the Committee,all references to the Board of Directors in the Plan shall mean and relate tothe Committee, except (i) as otherwise provided by the Board of Directorsand (ii) that only the Board of Directors may amend or terminate the Planas provided in Sections 3 and 13.

 

5.     **Types of Awards; Eligibility; Limitations.**

 

5.1           ***Types ofAwards, Eligibility*****.**  The Board of Directors may, from time totime, take the following actions, separately or in combination, under thePlan:  (i) grant Incentive StockOptions, as defined in Section 422 of the Internal Revenue Code of 1986,as amended (the “Code”), as provided in Sections 6.1, 6.2 and 8; (ii) grantoptions other than Incentive Stock Options (“Non-Statutory Stock Options”) asprovided in Sections 6.1, 6.3 and 8; (iii) grant stock appreciationrights as provided in Sections 7 and 8; (iv) award stock bonuses(including bonuses in the form of restricted stock units) as provided in Section 9;(v) sell shares subject to restrictions as provided in Sections 10; (vi) awardPerformance-Based Awards as provided in Section 11.  Awards may be made to employees, includingemployees who are officers or directors, and to non-employee directors;provided, however, that only employees of the Company or any parent orsubsidiary of the Company (as defined in subsections 424(e) and 424(f) ofthe Code) are eligible to receive Incentive Stock Options under the Plan.  The Board of Directors shall select theindividuals to whom awards shall be made and shall specify the action takenwith respect to each individual to whom an award is made.

 

5.2           ***PerEmployee Share Limitations*****.**  No employee may be granted options and/orstock appreciation rights for more than an aggregate of 500,000 shares ofCommon Stock in any calendar year; provided, however, that to the extent theannual limitation is not fully used in any year for an employee, any shares notused may be added to the number of shares for which options and/or stockappreciation rights may be granted to that employee in any future year.

 

5.3           ***Prohibitionon Option Repricing.***  Except as provided in Section 12,without the prior approval of the Company’s shareholders, an option issuedunder the Plan may not be repriced by lowering the option exercise price or bycancellation of an outstanding option with a subsequent replacement or regrantof an option with a lower exercise price.

 

5.4           ***MaximumNumber of Shares Issuable Upon Exercise of ISOs.******* Themaximum aggregate number of shares of Common Stock that may be issued under thePlan upon exercise of Incentive Stock

 

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Options shall be equal tothe sum of 3,000,000 shares plus any shares that at July 15, 2004 areavailable for grant under the Prior Plans or that may subsequently becomeavailable for grant under any of the Prior Plans through the expiration,termination, forfeiture or cancellation of grants, which number will not exceed9,568,684 shares.

 

5.5           ***Reservationof Additional Shares.***  Except as provided in Section 12,additional shares of Common Stock may not be reserved for issuance under thePlan without the approval of the Company’s shareholders.

 

6.     **Stock Options.**

 

6.1           ***General Rules Relatingto Options.***

 

6.1-1        **Terms of Grant.*** *The Board of Directors may grant options under the Plan.  With respect to each option grant, the Boardof Directors shall determine the number of shares subject to the option, theexercise price, the period of the option, the time or times at which the optionmay be exercised and whether the option is an Incentive Stock Option or aNon-Statutory Stock Option.  At the timeof the grant of an option or at any time thereafter, the Board of Directors mayprovide that an optionee who exercised an option with Common Stock of theCompany shall automatically receive a new option to purchase additional sharesequal to the number of shares surrendered and may specify the terms andconditions of such new options.

 

6.1-2        **Nontransferability.*** *Each Incentive Stock Option and, unless otherwise determined by theBoard of Directors, each other option granted under the Plan by its terms (i) shallbe nonassignable and nontransferable by the optionee, either voluntarily or byoperation of law, except by will or by the laws of descent and distribution ofthe state or country of the optionee’s domicile at the time of death, and (ii) duringthe optionee’s lifetime, shall be exercisable only by the optionee.

 

6.1-3        **Purchase of Shares.** Unless the Board of Directors determines otherwise, on or before thedate specified for completion of the purchase of shares pursuant to an optionexercise, the optionee must pay the Company the full purchase price of thoseshares in cash or by check or, with the consent of the Board of Directors, inwhole or in part, in Common Stock of the Company valued at fair market value,restricted stock or other contingent awards denominated in either stock orcash, promissory notes and other forms of consideration.  Unless otherwise determined by the Board ofDirectors, any Common Stock provided in payment of the purchase price must havebeen previously acquired and held by the optionee for at least six months.  The fair market value of Common Stock providedin payment of the purchase price shall be the closing price of the Common Stocklast reported before the time payment in Common Stock is made or, if earlier,committed to be made, if the Common Stock is publicly traded, or another valueof the Common Stock as specified by the Board of Directors.  No shares shall be issued until full paymentfor the shares has been made, including all amounts owed for taxwithholding.  With the consent of theBoard of Directors, an optionee may request the Company to apply automaticallythe shares to be received upon the exercise of a portion of a stock option(even though stock certificates have not yet been issued) to satisfy thepurchase price for additional portions of the option.

 

6.1-4        **Limitations on Grants toNon-Exempt Employees.*** *Unless otherwise determined by the Board ofDirectors, if an employee of the Company or any parent or subsidiary of theCompany is a non-exempt employee subject to the overtime compensationprovisions of Section 7 of the Fair Labor Standards Act (the “FLSA”), anyoption granted to that employee shall be subject to the followingrestrictions:  (i) the option priceshall be at least 85 percent of the fair market value, as described in Section 6.2-4,of the Common Stock subject to the option on the date it is granted; and (ii) theoption shall not be exercisable until at least six months after the date it isgranted; provided, however, that this six-month restriction on exercisabilitywill cease to apply if the employee dies, becomes disabled or retires, there isa change in ownership

 

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ofthe Company, or in other circumstances permitted by regulation, all asprescribed in Section 7(e)(8)(B) of the FLSA.

 

6.2           ***IncentiveStock Options*****.**  Incentive Stock Options shall be subject tothe following additional terms and conditions:

 

6.2-1        **Limitation on Amount ofGrants.*** *If the aggregate fair market value of stock (determined as of the datethe option is granted) for which Incentive Stock Options granted under thisPlan (and any other stock incentive plan of the Company or its parent orsubsidiary corporations, as defined in subsections 424(e) and 424(f) ofthe Code) are exercisable for the first time by an employee during any calendaryear exceeds $100,000, the portion of the option or options not exceeding$100,000, to the extent of whole shares, will be treated as an Incentive StockOption and the remaining portion of the option or options will be treated as aNon-Statutory Stock Option.  Thepreceding sentence will be applied by taking options into account in the orderin which they were granted.  If, underthe $100,000 limitation, a portion of an option is treated as an IncentiveStock Option and the remaining portion of the option is treated as aNon-Statutory Stock Option, unless the optionee designates otherwise at thetime of exercise, the optionee’s exercise of all or a portion of the optionwill be treated as the exercise of the Incentive Stock Option portion of theoption to the full extent permitted under the $100,000 limitation.  If an optionee exercises an option that istreated as in part an Incentive Stock Option and in part a Non-Statutory StockOption, the Company will designate the portion of the stock acquired pursuantto the exercise of the Incentive Stock Option portion as Incentive Stock Optionstock by issuing a separate certificate for that portion of the stock andidentifying the certificate as Incentive Stock Option stock in its stockrecords.

 

6.2-2        **Limitations on Grants to10 percent Shareholders.*** *An Incentive Stock Option may be grantedunder the Plan to an employee possessing more than 10 percent of the totalcombined voting power of all classes of stock of the Company or any parent orsubsidiary (as defined in subsections 424(e) and 424(f) of theCode) only if the option price is at least 110 percent of the fair marketvalue, as described in Section 6.2-4, of the Common Stock subject to theoption on the date it is granted and the option by its terms is not exercisableafter the expiration of five years from the date it is granted.

 

6.2-3        **Duration of Options.*** *Subject to Sections 6.2-2, 8.1 and 8.2, Incentive Stock Optionsgranted under the Plan shall continue in effect for the period fixed by theBoard of Directors, except that by its terms no Incentive Stock Option shall beexercisable after the expiration of 10 years from the date it is granted.

 

6.2-4        **Option Price.*** *The option price per share shall be determined by the Board ofDirectors at the time of grant.  Exceptas provided in Section 6.2-2, the option price shall not be less than100 percent of the fair market value of the Common Stock covered by theIncentive Stock Option at the date the option is granted.  The fair market value shall be the closingprice of the Common Stock last reported on the date the option is granted, ifthe stock is publicly traded, or another value of the Common Stock as specifiedby the Board of Directors.

 

6.2-5        **Limitation on Time of Grant.*** *No Incentive Stock Option shall be granted on or after the tenthanniversary of the last action by the Board of Directors adopting the Plan orapproving an increase in the number of shares available for issuance under thePlan, which action was subsequently approved within 12 months by theshareholders.

 

6.2-6        **Early Dispositions.*** *If within two years after an Incentive Stock Option is granted orwithin 12 months after an Incentive Stock Option is exercised, theoptionee sells or otherwise disposes of Common Stock acquired on exercise ofthe Option, the optionee shall within 30 days of the sale or disposition

 

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notifythe Company in writing of (i) the date of the sale or disposition, (ii) theamount realized on the sale or disposition and (iii) the nature of thedisposition (e.g., sale, gift, etc.).

 

6.3           ***Non-StatutoryStock Options.**** *Non-Statutory Stock Options shall be subjectto the following terms and conditions, in addition to those set forth inSections 6.1 and 8.

 

6.3-1        **Option Price.*** *The option price for Non-Statutory Stock Options shall be determined bythe Board of Directors at the time of grant. The option price shall not be less than 100 percent of the fairmarket value of the Common Stock covered by the Non-Statutory Stock Option atthe date the option is granted.  The fairmarket value shall be the closing price of the Common Stock last reported onthe date the option is granted, if the stock is publicly traded, or anothervalue of the Common Stock as specified by the Board of Directors.

 

6.3-2        **Duration of Options.*** *Non-Statutory Stock Options granted under the Plan shall continue ineffect for the period fixed by the Board of Directors, except that noNon-Statutory Option shall be exercisable after the expiration of 10 years fromthe date it is granted.

 

7.     **Stock Appreciation Rights.**

 

7.1           ***Grant.***  Stockappreciation rights may be granted under the Plan by the Board of Directors,subject to such rules, terms, and conditions as the Board of Directorsprescribes.  The Board of Directors mayprovide that stock appreciation rights may be granted in substitution for stockoptions granted under the Plan.  Withrespect to each grant, the Board shall determine the number of shares subjectto the stock appreciation right, the exercise price of the stock appreciationright, the period of the stock appreciation right, and the time or times atwhich the stock appreciation right may be exercised.  Stock appreciation rights shall continue ineffect for the period fixed by the Board of Directors.

 

7.2           ***StockAppreciation Rights Granted in Connection with Options.***  If astock appreciation right is granted in connection with an option, the stockappreciation right shall be exercisable only to the extent and on the sameconditions that the related option could be exercised.  Upon exercise of a stock appreciation right,any option or portion thereof to which the stock appreciation right relatesterminates.  If a stock appreciationright is granted in connection with an option, upon exercise of the option, thestock appreciation right or portion thereof to which the grant relates terminates.

 

7.3           ***Exercise.***  Eachstock appreciation right shall entitle the holder, upon exercise, to receivefrom the Company in exchange therefor an amount equal in value to the excess ofthe fair market value on the date of exercise of one share of Common Stock ofthe Company over the exercise price as determined by the Board of Directors(or, in the case of a stock appreciation right granted in connection with anoption, the option price per share under the option to which the stockappreciation right relates), multiplied by the number of shares covered by thestock appreciation right, or portion thereof, that is surrendered.  Payment by the Company upon exercise of astock appreciation right may be made in Common Stock valued at fair marketvalue, in cash, or partly in Common Stock and partly in cash, all as determinedby the Board of Directors.  For thispurpose, the fair market value of the Common Stock shall be the closing priceof the Common Stock last reported before the time of exercise, or such other valueof the Common Stock as specified by the Board of Directors.

 

7.4           ***FractionalShares.***  No fractional shares shall be issued uponexercise of a stock appreciation right. In lieu thereof, cash may be paid in an amount equal to the value of thefraction or, if the Board of Directors shall determine, the number of sharesmay be rounded downward to the next whole share.

 

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7.5           ***Nontransferability.******* Eachstock appreciation right granted in connection with an Incentive Stock Optionand, unless otherwise determined by the Board of Directors, each other stockappreciation right granted under the Plan, by its terms shall be nonassignableand nontransferable by the holder, either voluntarily or by operation of law,except by will or by the laws of descent and distribution of the state orcountry of the holder’s domicile at the time of death, and each stockappreciation right by its terms shall be exercisable during the holder’slifetime only by the holder.

 

8.     **Exercise of Options and Stock Appreciation Rights*.***

 

8.1           ***Exercise.*** Except as provided in Section 8.2 or as determined by the Board ofDirectors, no option or stock appreciation right granted under the Plan may beexercised unless at the time of exercise the holder is employed by or in theservice of the Company and shall have been so employed or provided such servicecontinuously since the date the option or stock appreciation right wasgranted.  Except as provided in Sections8.2 and 12, options and stock appreciation rights granted under the Plan may beexercised from time to time over the period stated in each option or stockappreciation right in amounts and at times prescribed by the Board ofDirectors, provided that options and stock appreciation rights may not beexercised for fractional shares.  Unlessotherwise determined by the Board of Directors, if a holder does not exercisean option or stock appreciation right in any one year for the full number ofshares to which the holder is entitled in that year, the holder’s rights shallbe cumulative and the holder may acquire those shares in any subsequent yearduring the term of the option or stock appreciation right.

 

8.2           ***Terminationof Employment or Service*****.**

 

8.2-1        **General Rule.** Unless otherwise determined by the Board of Directors, if a holder’semployment or service with the Company terminates for any reason other thanbecause of total disability or death as provided in Sections 8.2-2 and 8.2-3,his or her option or stock appreciation right may be exercised at any timebefore the expiration date of the option or stock appreciation right or the expirationof 3 months after the date of termination, whichever is the shorterperiod, but only if and to the extent the holder was entitled to exercise theoption or stock appreciation right at the date of termination.  Notwithstanding the foregoing, unlessotherwise determined by the Board of Directors, if a holder’s employment orservice with the Company terminates for any reason other than because of totaldisability or death as provided in Sections 8.2-2 and 8.2-3, and such holderdies before the expiration date of the option or stock appreciation right andthe expiration of 3 months after the date of termination, his or her option orstock appreciation right may be exercised at any time before the expirationdate of the option or stock appreciation right or before the date12 months after the date of termination, whichever is the shorter period,but only if and to the extent the holder was entitled to exercise the option orstock appreciation right at the date of termination and only by the person orpersons to whom the holder’s rights under the option or stock appreciationright shall pass by the holder’s will or by the laws of descent anddistribution of the state or country of domicile at the time of death.

 

8.2-2        **Termination Because of TotalDisability.**** Unless otherwise determined by the Board ofDirectors, if a holder’s employment or service with the Company terminatesbecause of total disability, his or her option or stock appreciation right maybe exercised at any time before the expiration date of the option or stockappreciation right or before the date 12 months after the date oftermination, whichever is the shorter period, but only if and to the extent theholder was entitled to exercise the option or stock appreciation right at thedate of termination.  The term “totaldisability” means a medically determinable mental or physical impairment thatis expected to result in death or has lasted or is expected to last for acontinuous period of 12 months or more and that, in the opinion of theCompany and two independent physicians, causes the holder to be unable toperform his or her duties as an employee, director or officer of the Employerand unable to be engaged in any

 

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substantialgainful activity.  Total disability shallbe deemed to have occurred on the first day after the two independentphysicians have furnished their written opinion of total disability to theCompany and the Company has reached an opinion of total disability.

 

8.2-3        **Termination Because of Death.** Unless otherwise determined by the Board of Directors, if a holder dieswhile employed by or providing service to the Company, his or her option orstock appreciation right may be exercised at any time before the expirationdate of the option or stock appreciation right or before the date12 months after the date of death, whichever is the shorter period, butonly if and to the extent the holder was entitled to exercise the option orstock appreciation right at the date of death and only by the person or personsto whom the holder’s rights under the option or stock appreciation right shallpass by the holder’s will or by the laws of descent and distribution of thestate or country of domicile at the time of death.

 

8.2-4        **Amendment of Exercise PeriodApplicable to Termination.**  The Board of Directors may at any time extendthe 3-month and 12-month exercise periods any length of time not longer thanthe original expiration date of the option or stock appreciation right.  The Board of Directors may at any timeincrease the portion of an option or stock appreciation right that isexercisable, subject to terms and conditions determined by the Board ofDirectors.

 

8.2-5        **Failure to Exercise Option orStock Appreciation Right.*** *To the extent thatthe option or stock appreciation right of any deceased holder or any holderwhose employment or service terminates is not exercised within the applicableperiod, all further rights to purchase shares pursuant to the option or stockappreciation right shall cease and terminate.

 

8.2-6        **Leave of Absence.** Absence on leave approved by the Employer oron account of illness or disability shall not be deemed a termination orinterruption of employment or service. Unless otherwise determined by the Board of Directors, vesting ofoptions and stock appreciation rights shall continue during a medical, familyor military leave of absence or other leave approved by the Employer, whetherpaid or unpaid, and vesting of options and stock appreciation rights shall besuspended during any other unpaid leave of absence.

 

8.3           ***Notice ofExercise or Surrender.***  Unless the Board of Directors determinesotherwise, shares may be acquired pursuant to an option or stock appreciationright granted under the Plan only upon the Company’s receipt of written noticefrom the holder of the holder’s binding commitment to purchase shares,specifying the number of shares the holder desires to acquire under the optionor stock appreciation right and the date on which the holder agrees to completethe transaction, and, if required to comply with the Securities Act of 1933,containing a representation that it is the holder’s intention to acquire theshares for investment and not with a view to distribution.  Unless the Board of Directors determinesotherwise, cash may be paid upon surrender of a stock appreciation rightgranted under the Plan only upon the Company’s receipt of written notice fromthe holder of the holder’s binding commitment to surrender the stockappreciation right, specifying the number of shares subject to the stockappreciation right being surrendered and the date on which the holder agrees tocomplete the surrender.

 

8.4           ***TaxWithholding.***  Each holder who has exercised an optionor stock appreciation right shall, immediately upon notification of the amountdue, if any, pay to the Company in cash or by check amounts necessary tosatisfy any applicable federal, state and local tax withholdingrequirements.  If additionalwithholding is or becomes required (as a result of exercise of an option orstock appreciation right or as a result of disposition of shares acquiredpursuant to exercise of an option or stock appreciation right) beyond anyamount deposited before delivery of the certificates, the holder shall pay suchamount, in cash or by check, to the Company on demand.  If the holder fails to pay the amountdemanded, the Company or the Employer may withhold that amount from otheramounts payable to the holder, including salary, subject to applicable law.

 

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With the consent ofthe Board of Directors, a holder may satisfy this obligation, in whole or inpart, by instructing the Company to withhold from the shares to be issued uponexercise or by delivering to the Company other shares of Common Stock;provided, however, that the number of shares so withheld or delivered in connectionwith an option exercise shall not exceed the minimum amount necessary tosatisfy the required withholding obligation.

 

8.5           ***Reduction ofReserved Shares.***  Upon the exercise of an option or stockappreciation right, the number of shares reserved for issuance under the Planshall be reduced by the number of shares issued upon exercise of the option orstock appreciation right.  Cash paymentsof stock appreciation rights shall not reduce the number of shares of CommonStock reserved for issuance under the Plan.

 

9.     **Stock Bonuses.**  TheBoard of Directors may award shares under the Plan as stock bonuses, includingrestricted stock units that provide for delivery of Common Stock at a laterdate.  Shares awarded as a bonus shall besubject to the terms, conditions and restrictions determined by the Board ofDirectors.  The restrictions may includerestrictions concerning transferability and forfeiture of the shares awarded,together with any other restrictions determined by the Board of Directors.  The Board of Directors may require therecipient to sign an agreement as a condition of the award, but may not requirethe recipient to pay any monetary consideration other than amounts necessary tosatisfy tax withholding requirements. The agreement may contain any terms, conditions, restrictions,representations and warranties required by the Board of Directors.  The certificates representing the sharesawarded shall bear any legends required by the Board of Directors.  The Company may require any recipient of astock bonus to pay to the Company in cash or by check upon demand amountsnecessary to satisfy any applicable federal, state or local tax withholdingrequirements.  If the recipient fails topay the amount demanded, the Company or the Employer may withhold that amountfrom other amounts payable to the recipient, including salary, subject toapplicable law. With the consent of the Board of Directors, a recipient maysatisfy this obligation, in whole or in part, by instructing the Company towithhold from any shares to be issued or by delivering to the Company othershares of Common Stock; provided, however, that the number of shares sowithheld or delivered shall not exceed the minimum amount necessary to satisfythe required withholding obligation. Upon the issuance of a stock bonus, the number of shares reserved forissuance under the Plan shall be reduced by the number of shares issued.

 

10.   **Restricted Stock**

 

10.1         ***RestrictedStock.*** The Board of Directors may issue shares underthe Plan for any consideration (including promissory notes and services)determined by the Board of Directors. Shares issued under the Plan shall be subject to the terms, conditionsand restrictions determined by the Board of Directors; provided, however, thatany award made under this Section 10 the vesting for which is time-basedwill provide for a restriction period of at least three years, with therestriction to lapse no more quickly than with respect to one-third of theshares annually over the three-year restriction period.  Subject to the provisions of the Plan, therestrictions may include restrictions concerning transferability, repurchase bythe Company and forfeiture of the shares issued, together with any otherrestrictions determined by the Board of Directors.  All Common Stock issued pursuant to this Section 10.1shall be subject to a Restricted Stock Agreement, which shall be executed bythe Company and the prospective recipient of the shares before the delivery ofcertificates representing the shares. The Agreement may contain any terms, conditions, restrictions,representations and warranties required by the Board of Directors.

 

10.2         ***OtherProvisions*****.**  The certificates representing shares ofrestricted stock shall bear any legends required by the Board ofDirectors.  The Company may require anyparticipant receiving restricted stock to pay to the Company in cash or bycheck upon demand amounts necessary to satisfy any applicable federal, state orlocal tax withholding requirements.  Ifthe participant fails to pay the amount demanded, the Company or the Employermay withhold that amount from other amounts payable to the participant,including salary, subject

 

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toapplicable law.  With the consent of theBoard of Directors, a participant may satisfy this obligation, in whole or inpart, by instructing the Company to withhold from any shares to be issued or bydelivering to the Company other shares of Common Stock; provided, however, thatthe number of shares so withheld or delivered shall not exceed the minimumamount necessary to satisfy the required withholding obligation.  Upon the issuance of restricted stock, thenumber of shares reserved for issuance under the Plan shall be reduced by thenumber of shares issued.

 

11.   **Performance-Based Awards.**  TheBoard of Directors may grant awards intended to qualify as qualifiedperformance-based compensation under Section 162(m) of the Code and theregulations thereunder (“Performance-Based Awards”).  Performance-Based Awards shall be denominatedat the time of grant either in Common Stock (“Stock Performance Awards”) or indollar amounts (“Dollar Performance Awards”). Payment under a Stock Performance Award or a Dollar Performance Awardshall be made, at the discretion of the Board of Directors, in Common Stock (“PerformanceShares”), or in cash or in any combination thereof.  Performance-Based Awards shall be subject tothe following terms and conditions:

 

11.1         ***AwardPeriod.**** *The Board of Directors shall determine theperiod of time for which a Performance-Based Award is made (the “Award Period”).

 

11.2         ***PerformanceGoals and Payment.**** *The Board of Directors shall establish inwriting objectives (“Performance Goals”) that must be met by the Company or anysubsidiary, division or other unit of the Company (“Business Unit”) during theAward Period as a condition to payment being made under the Performance-BasedAward.  The Performance Goals for eachaward shall be one or more targeted levels of performance with respect to oneor more of the following objective measures with respect to the Company or anyBusiness Unit:  earnings, earnings pershare, stock price increase, total shareholder return (stock price increaseplus dividends), return on equity, return on assets, return on capital,economic value added, revenues, operating income, inventories, inventory turns,cash flows, or any of the foregoing before the effect of acquisitions,divestitures, accounting changes, and restructuring and special charges(determined according to criteria established by the Board of Directors).  The Board of Directors shall also establishthe number of Performance Shares or the amount of cash payment to be made undera Performance-Based Award if the Performance Goals are met or exceeded,including the fixing of a maximum payment (subject to Section 11.4).  The Board of Directors may establish otherrestrictions to payment under a Performance-Based Award, such as a continuedemployment requirement, in addition to satisfaction of the Performance Goals.  Some or all of the Performance Shares may beissued at the time of the award as restricted shares subject to forfeiture inwhole or in part if Performance Goals or, if applicable, other restrictions arenot satisfied.

 

11.3         ***Computationof Payment.**** *During or after an Award Period, theperformance of the Company or Business Unit, as applicable, during the periodshall be measured against the Performance Goals.  If the Performance Goals are not met, nopayment shall be made under a Performance-Based Award.  If the Performance Goals are met or exceeded,the Board of Directors shall certify that fact in writing and certify thenumber of Performance Shares earned or the amount of cash payment to be madeunder the terms of the Performance-Based Award.

 

11.4         ***MaximumAwards.**** *No participant may receive in any fiscal yearStock Performance Awards under which the aggregate amount payable under theAwards exceeds the equivalent of 200,000 shares of Common Stock or DollarPerformance Awards under which the aggregate amount payable under the Awardsexceeds $4,000,000.

 

11.5         ***TaxWithholding.**** *Each participant who has received PerformanceShares shall, upon notification of the amount due, pay to the Company in cashor by check amounts necessary to satisfy any applicable federal, state andlocal tax withholding requirements.  If theparticipant fails to pay the amount

 

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demanded,the Company or the Employer may withhold that amount from other amounts payableto the participant, including salary, subject to applicable law.  With the consent of the Board of Directors, aparticipant may satisfy this obligation, in whole or in part, by instructingthe Company to withhold from any shares to be issued or by delivering to theCompany other shares of Common Stock; provided, however, that the number ofshares so delivered or withheld shall not exceed the minimum amount necessaryto satisfy the required withholding obligation.

 

11.6         ***Effect onShares Available.**** *The payment of a Performance-Based Award incash shall not reduce the number of shares of Common Stock reserved forissuance under the Plan.  The number ofshares of Common Stock reserved for issuance under the Plan shall be reduced bythe number of shares issued upon payment of an award.  Cash payments of Performance-Based Awardsshall not reduce the number of shares of Common Stock reserved for issuanceunder the Plan.

 

12.   **Changes in Capital Structure.**

 

12.1         ***StockSplits, Stock Dividends.**** *If the outstanding Common Stock of theCompany is hereafter increased or decreased or changed into or exchanged for adifferent number or kind of shares or other securities of the Company by reasonof any stock split, combination of shares, dividend payable in shares,recapitalization or reclassification, appropriate adjustment shall be made bythe Board of Directors in the number and kind of shares available for grantsunder the Plan and in all other share amounts set forth in the Plan.  In addition, the Board of Directors shallmake appropriate adjustment in the number and kind of shares as to whichoutstanding options and stock appreciation rights, or portions thereof thenunexercised, shall be exercisable, so that the holder’s proportionate interestbefore and after the occurrence of the event is maintained.  Notwithstanding the foregoing, the Board ofDirectors shall have no obligation to effect any adjustment that would or mightresult in the issuance of fractional shares, and any fractional sharesresulting from any adjustment may be disregarded or provided for in any mannerdetermined by the Board of Directors. Any such adjustments made by the Board of Directors shall be conclusive.

 

12.2         ***Mergers,Reorganizations, Etc.**** *In the event of a merger, consolidation, planof exchange, acquisition of property or stock, split-up, split-off, spin-off,reorganization or liquidation to which the Company is a party or any sale,lease, exchange or other transfer (in one transaction or a series of relatedtransactions) of all, or substantially all, of the assets of the Company (each,a “Transaction”), the Board of Directors shall, in its sole discretion and tothe extent possible under the structure of the Transaction, select one of thefollowing alternatives for treating outstanding options and stock appreciationrights under the Plan:

 

12.2-1      Outstanding options and stock appreciationrights shall remain in effect in accordance with their terms.

 

12.2-2      Outstanding options and stock appreciationrights shall be converted into options and stock appreciation rights topurchase stock in one or more of the corporations, including the Company, thatare the surviving or acquiring corporations in the Transaction.  The amount, type of securities subjectthereto and exercise price of the converted options and stock appreciationrights shall be determined by the Board of Directors of the Company, takinginto account the relative values of the companies involved in the Transactionand the exchange rate, if any, used in determining shares of the survivingcorporation(s) to be held by holders of shares of the Company following theTransaction.  Unless otherwise determinedby the Board of Directors, the converted options and stock appreciation rightsshall be vested only to the extent that the vesting requirements relating tooptions granted hereunder have been satisfied.

 

12.2-3      The Board of Directors shall provide a periodof 30 days or less before the completion of the Transaction during whichoutstanding options and stock appreciation rights may be exercised

 

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tothe extent then exercisable, and upon the expiration of that period, allunexercised options and stock appreciation rights shall immediatelyterminate.  The Board of Directors may,in its sole discretion accelerate the exercisability of options and stockappreciation rights so that they are exercisable in full during that period.

 

12.3         ***Dissolutionof the Company.**** *In the event of the dissolution of theCompany, options and stock appreciation rights shall be treated in accordancewith Section 12.2-3.

 

12.4         ***RightsIssued by Another Corporation.**** *The Board of Directors may also grant options, stock appreciation rights,stock bonuses and Performance-Based Awards and issue restricted stock under thePlan with terms, conditions and provisions that vary from those specified inthe Plan, provided that any such awards are granted in substitution for, or inconnection with the assumption of, existing options, stock appreciation rights,stock bonuses, Performance-Based Awards or restricted stock granted, awarded orissued by another corporation and assumed or otherwise agreed to be providedfor by the Company pursuant to or by reason of a Transaction.

 

13.   **Amendment of the Plan.**  TheBoard of Directors may at any time modify or amend the Plan in anyrespect.  Except as provided in Section 12,however, no change in an award already granted shall be made without thewritten consent of the holder of the award if the change would adversely affectthe holder.

 

14.   **Approvals.** TheCompany’s obligations under the Plan are subject to the approval of state andfederal authorities or agencies with jurisdiction in the matter.  The Company will use its best efforts to takesteps required by state or federal law or applicable regulations, including rules andregulations of the Securities and Exchange Commission and any stock exchange onwhich the Company’s shares may then be listed, in connection with the grantsunder the Plan.  The foregoingnotwithstanding, the Company shall not be obligated to issue or deliver CommonStock under the Plan if such issuance or delivery would violate state orfederal securities laws.

 

15.   **Employment and ServiceRights.**  Nothing in the Plan or any award pursuant tothe Plan shall (i) confer upon any employee any right to be continued inthe employment of an Employer or interfere in any way with the Employer’s rightto terminate the employee’s employment at will at any time, for any reason,with or without cause, or to decrease the employee’s compensation or benefits,or (ii) confer upon any person engaged by an Employer any right to beretained or employed by the Employer or to the continuation, extension, renewalor modification of any compensation, contract or arrangement with or by theEmployer.

 

**Rights as a Shareholder.****** Therecipient of any award under the Plan shall have no rights as a shareholderwith respect to any shares of Common Stock until the date the recipient becomesthe holder of record of those shares. Except as otherwise expressly provided inthe Plan, no adjustment shall be made for dividends or other rights for whichthe record date occurs before the date the recipient becomes the holder of record.

 

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